FILED 1 AUG 01 2016 2 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK 3 UNITED STATES BANKRUPTCY APPELLATE PANEL U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 4 OF THE NINTH CIRCUIT 5 In re: ) BAP Nos. 15-1367-DTaJu ) 15-1378-DTaJu 6 FRANCES ELIZABETH PASS, ) (related appeals) ) 7 Debtor. ) Bk. No. 13-16171-B-7 ______________________________) 8 ) JAMES E. SALVEN, CHAPTER 7 ) 9 TRUSTEE, ) ) 10 Appellant, ) ) 11 v. ) O P I N I O N ) 12 ALADINO JOSEPH GALLI; ) FRANCES ELIZABETH PASS, ) 13 ) Appellees. ) 14 ______________________________) 15 Argued and Submitted on June 23, 2016 at Sacramento, California 16 Filed - August 1, 2016 17 Appeal from the United States Bankruptcy Court 18 for the Eastern District of California 19 Honorable W. Richard Lee, Bankruptcy Judge, Presiding 20 21 Appearances: Trudi G. Manfredo, argued for Appellant James L. Salven; Appellee Aladino Joseph Galli argued pro 22 se. 23 24 Before: DUNN, TAYLOR and JURY, Bankruptcy Judges. 25 26 27 28 1 DUNN, Bankruptcy Judge: 2 3 Frances Elizabeth Pass and Aladino Joseph Galli commenced a 4 chapter 131 case in 2009, while they were married but intending 5 to separate. In 2002, they had recorded a declaration of 6 homestead as to their residence in Fresno, California. They also 7 claimed their residence as exempt under California’s automatic 8 homestead exemption when they filed their bankruptcy case. 9 During the pendency of the case, Pass and Galli terminated their 10 marriage and purported to divide their marital property without 11 seeking relief from the automatic stay. The joint case was 12 severed, Pass converted her case to chapter 7, and Galli allowed 13 his case to be dismissed. After conversion, Pass amended her 14 exemptions to claim a homestead exemption in a different home, 15 while Galli continued to reside in the previously claimed 16 homestead. Over the objection of the chapter 7 trustee James 17 Salven (“Trustee”), Pass’ exemption was allowed. The Trustee 18 elected to pursue Galli’s home instead through an adversary 19 proceeding, but the bankruptcy court entered an order and 20 judgment declaring, among other things, that Galli’s declaration 21 of homestead created an interest in the home that the Trustee 22 could not avoid. The Trustee appeals the order and judgment 23 separately. With respect to both appeals, we AFFIRM on the 24 25 1 Unless otherwise indicated, all chapter and section 26 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 27 All “Rule” references are to the Federal Rules of Bankruptcy Procedure. All “Civil Rule” references are to the Federal Rules 28 of Civil Procedure.
2 1 alternative basis that Galli has a valid automatic homestead 2 exemption under California law. 3 I. FACTUAL BACKGROUND 4 Before they filed their petition, Pass and Galli were 5 married and living together in a home on Manila Avenue in Fresno, 6 California (the “Manila Avenue House”). They had been living 7 there at least since 2002, at which time they filed a declaration 8 of homestead in relation to the Manila Avenue House as allowed by 9 California law (“2002 Homestead Declaration”). See California 10 Code of Civil Procedure (“CCP”) § 704.920. Then, in the fall of 11 2009, Pass purchased a house in Coalinga, California (the 12 “Coalinga House”) after accepting a position in her employer’s 13 Coalinga office. Pass and Galli had decided to end their 14 marriage, and Pass began refurbishing the Coalinga House with the 15 intention of moving into it permanently. 16 Meanwhile, Pass and Galli filed a joint chapter 13 petition 17 on December 30, 2009. In their bankruptcy schedules, as amended 18 in February 2010, they claimed a homestead exemption in the 19 Manila Avenue House pursuant to CCP § 704.730, applicable in 20 bankruptcy by virtue of § 522(b)(3)(A). The stated value of the 21 claimed exemption was $43,764.64. In 2010, while their joint 22 bankruptcy case was in progress, Pass and Galli obtained a 23 judgment of legal separation in the Superior Court of Fresno 24 County (“Separation Judgment”). Though Pass and Galli did not 25 request or obtain relief from the automatic stay, the Separation 26 Judgment purported to award the Manila Avenue House to Galli as 27 his sole and separate property. Accordingly, Pass changed her 28 address of record with the bankruptcy court to indicate that the
3 1 Coalinga House was her residence. 2 In December 2011, still without having requested relief from 3 the automatic stay, Pass and Galli executed and recorded a grant 4 deed, purporting to transfer the Manila Avenue House to Pass and 5 Galli as joint tenants (“Grant Deed”). Pass later changed her 6 address of record again, indicating that the Manila Avenue House 7 was her residence. In April 2013, the state court entered a 8 judgment of marital dissolution, which purported to grant Pass 9 and Galli each a one-half interest in the Manila Avenue House 10 (“Dissolution Judgment”). Once again, relief from stay was 11 neither sought nor granted. 12 In September 2013, Pass moved the bankruptcy court to sever 13 the joint chapter 13 case and to convert her case to chapter 7. 14 The court granted both requests. Pass was assigned to a new 15 chapter 7 case, while Galli remained in the original chapter 13 16 case. Pass filed a new amendment to her schedules, now claiming 17 an exemption in the Coalinga House under CCP § 704.730 in the 18 amount of $75,000. As for Galli, it appears that he stopped 19 making payments under the chapter 13 plan, and his case was 20 dismissed. 21 The Trustee was appointed to administer Pass’ chapter 7 22 estate. He objected to Pass’ claimed exemption in the Coalinga 23 House, alleging that she was not in fact living at the Coalinga 24 House on the date of the order for relief in the original joint 25 case. The Trustee noted that, on the joint petition and 26 schedules, both Pass and Galli had indicated they resided at the 27 Manila Avenue House. 28 After an evidentiary hearing on the Trustee’s objection, the
4 1 bankruptcy court entered a memorandum decision and an order 2 overruling the objection. The court was persuaded by Pass’ 3 testimony that she left the Manila Avenue House and moved into 4 the Coalinga House, with no intention ever to return, hours 5 before the joint petition was filed. The order overruling the 6 Trustee’s objection and allowing Pass’ exemption in the Coalinga 7 House was entered on November 3, 2014, and was not appealed. 8 Meanwhile, the Trustee had also begun efforts to sell the 9 Manila Avenue House. He made a motion under § 363(f) to sell the 10 Manila Avenue House free and clear of any interest of Galli, 11 notwithstanding a new declaration of homestead Galli had filed in 12 January 2014 (“2014 Homestead Declaration”). Shortly before a 13 hearing on the § 363(f) motion, the Trustee filed an adversary 14 proceeding seeking (i) to avoid the property transfers effected 15 by the Separation Judgment, the 2011 Grant Deed and the 16 Dissolution Judgment, as well as Galli’s 2014 Homestead 17 Declaration; (ii) to determine the nature, extent and validity of 18 interests in the Manila Avenue House; and (iii) for authority to 19 sell the Manila Avenue House. 20 The court held its hearing on the § 363(f) motion on May 29, 21 2014. Along with the Trustee’s counsel, Pass appeared through 22 counsel in support of the motion. Galli appeared in opposition 23 to the motion, which he aptly characterized as “a motion to take 24 [his] home.” At the hearing on the § 363(f) motion, the court 25 commented on the muddled status of the ex-spouses’ respective 26 property interests and exemption rights. While acknowledging the 27 Trustee’s contention that the postpetition title transfers were 28 void due to the automatic stay, the court concluded that “the
5 1 status of title right now is there’s a co-owner to this house, 2 and you can’t sell co-owned property without an adversary 3 proceeding.” Thus, the court refused to grant the § 363(f) 4 motion without first resolving the title and exemption issues 5 through the adversary proceeding. 6 In December 2014, the Trustee moved for summary judgment in 7 the adversary proceeding based on stipulated facts agreed to by 8 Galli.2 Among other things, they stipulated that the transfers 9 of the Manila Avenue House had been made without relief from the 10 automatic stay and that the Manila Avenue House was community 11 property as of the December 2009 petition date. Based on those 12 stipulations, the Trustee argued that no dispute existed as to 13 any material fact, and he was entitled as a matter of law to 14 judgment on the following points: 15 1. The transfers made in the Separation Judgment, the Grant 16 Deed and the Dissolution Judgment were void, because they were in 17 violation of the automatic stay. 18 2. The transfers made in the Separation Judgment, the Grant 19 Deed and the Dissolution Judgment should be avoided because they 20 were made in violation of Pass and Galli’s confirmed chapter 13 21 plan, as well as the bankruptcy court’s General Order 05-03, 22 which prohibited such property transfers without the chapter 13 23 24 2 The Trustee failed to include a copy of the motion for 25 summary judgment in his excerpts of the record. We have exercised our discretion to take judicial notice of papers filed 26 with the bankruptcy court. See O’Rourke v. Seaboard Sur. Co. (In 27 re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1988); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 28 227, 233 n.9 (9th Cir. BAP 2003).
6 1 trustee’s consent or court order. 2 3. The transfers made in the Dissolution Judgment and the 3 2014 Homestead Declaration were “void as being post petition 4 transfers.” 5 4. The Manila Avenue House was community property and 6 therefore property of the Pass bankruptcy estate. 7 5. Galli had no entitlement to a homestead exemption in the 8 Manila Avenue House. 9 The court set out its findings and conclusions regarding the 10 summary judgment motion in a memorandum decision. Based on the 11 parties’ stipulation, the court concluded that there was no 12 dispute as to any issue of material fact. As to the community 13 property issue, the court concluded that Galli had conceded the 14 point, and no dispute remained. But, as to the issue of Galli’s 15 claimed homestead exemption, the court concluded that Galli had a 16 valid “homestead interest” that could not be avoided. 17 The bankruptcy court went on to explain that it based its 18 decision on the 2002 Homestead Declaration filed by Pass and 19 Galli. Noting that a declaration of homestead prevents judgment 20 liens from attaching to the declared homestead unless there is 21 sufficient equity to pay the homestead exemption in full, and 22 that the Trustee’s liquidation powers “are derived from those of 23 a creditor who holds a judgment lien,” the court concluded that 24 the Trustee could not sell the Manila Avenue House without paying 25 Galli the value of his homestead exemption. The court rejected 26 the Trustee’s argument that the declaration of homestead cannot 27 prevent an involuntary sale. Instead, the court reasoned that 28 the proposed sale could be analyzed as either voluntary or
7 1 involuntary, but “[e]ither way, . . . the Trustee will have to 2 pay Galli the value of his Declared Homestead . . . .” 3 Based on the conclusions laid out in the memorandum 4 decision, the bankruptcy court entered an order disposing of the 5 summary judgment motion (“Summary Judgment Order”), which 6 provided as follows: 7 IT IS HEREBY ORDERED that the motion for summary judgment is GRANTED in so far as the Trustee seeks a 8 declaration that the [Manila Avenue House] is still community property of the Galli/Pass marriage and still 9 property of this bankruptcy estate. IT IS FURTHER ORDERED that the Motion for summary 10 judgment is DENIED with respect to the Trustee’s request that the [Manila Avenue House] may be sold free 11 and clear of Galli’s homestead interest with no compensation to Galli. 12 13 Two weeks later, the court entered judgment consistent with the 14 Summary Judgment Order (“Judgment”). The Judgment first declared 15 all of the following void: (1) the purported transfer of the 16 Manila Avenue House to Galli as his sole and separate property as 17 part of the Separation Judgment; (2) the Grant Deed executed by 18 Galli purporting to transfer an undivided 50% interest in the 19 Manila Avenue House to Pass; (3) the Dissolution Judgment, to the 20 extent that it purported to grant Pass and Galli each a 50% 21 interest in the Manila Avenue House; and (4) Galli’s 2014 22 Homestead Declaration. Accordingly, the Judgment declared that 23 the Manila Avenue House remained both community property and 24 property of the estate. Finally, the Judgment declared that 25 Galli had a “homestead interest” by virtue of the 2002 Homestead 26 Declaration, and the Trustee had no authority to sell the Manila 27 Avenue Property without compensating Galli for his interest. 28 The Trustee appealed separately from the Summary Judgment
8 1 Order and the Judgment. 2 II. JURISDICTION 3 The bankruptcy court had jurisdiction under 28 U.S.C. 4 §§ 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. 5 § 158. 6 III. ISSUES 7 1. Whether the 2002 Homestead Declaration operates to 8 prevent the Trustee from selling the Manila Avenue House without 9 compensating Galli. 10 2. Whether Galli is entitled to an automatic homestead 11 exemption under California law. 12 IV. STANDARD OF REVIEW 13 We review de novo the bankruptcy court’s decision to grant 14 or deny summary judgment. Heers v. Parsons (In re Heers), 529 15 B.R. 734, 740 (9th Cir. BAP 2015); Khaligh v. Hadaegh (In re 16 Khaligh), 338 B.R. 817, 823 (9th Cir. BAP 2006), aff’d, 506 F.3d 17 956 (9th Cir. 2007). If the appellant is entitled to summary 18 judgment, we may reverse and grant summary judgment in favor of 19 the appellant. Nat’l Motor Freight Traffic Ass’n v. Superior 20 Fast Freight, Inc. (In re Superior Fast Freight, Inc.), 202 B.R. 21 485, 487 (9th Cir. BAP 1996). We likewise apply de novo review 22 to the bankruptcy court’s interpretation of state law. Diaz v. 23 Kosmala (In re Diaz), 547 B.R. 329, 333 (9th Cir. BAP 2016). 24 V. DISCUSSION 25 We agree with the bankruptcy court that the facts are not in 26 dispute. Thus, the Trustee is entitled to summary judgment only 27 if he can show he is “entitled to judgment as a matter of law.” 28 Civil Rule 56(a); Rule 7056; Anderson v. Liberty Lobby, Inc., 477
9 1 U.S. 242, 249 (1986). The only provisions of the Summary 2 Judgment Order and the Judgment that are challenged on appeal are 3 those concerning Galli’s “homestead interest.” We limit our 4 review to those issues. 5 The bankruptcy court premised its decision regarding the 6 homestead issue on the protections accorded to declared 7 homesteads, as opposed to the automatic homestead exemption. The 8 Trustee argued before the bankruptcy court and argues on appeal 9 that neither benefit was available to Galli. In the discussion 10 that follows, we are mindful of the imperative under California 11 law to construe exemption statutes liberally in favor of the 12 debtor. Wells Fargo Fin’l Leasing, Inc. v. D & M Cabinets, 177 13 Cal. App. 4th 59, 73 (2009). At the same time, we must not 14 “rewrite the California legislature’s scheme for homestead 15 protection.” Redwood Empire Production Credit Assoc. v. Anderson 16 (In re Anderson), 824 F.2d 754, 759 (9th Cir. 1987). 17 A. There are two varieties of homestead protection under California law. 18 19 We begin our discussion with a brief review of the nature of 20 California homestead law. Under California law, two species of 21 homestead protection are available to judgment debtors, the 22 “automatic” (or Article 4) homestead exemption and the “declared” 23 (or Article 5) homestead protection,3 respectively. These 24 protections are available under different circumstances, they 25 26 3 The California statute does not use the word “exemption” 27 to describe the declared homestead protection. Indeed, as discussed below, a declaration of homestead does not create any 28 exemption directly except in the proceeds of a voluntary sale.
10 1 serve different purposes and they confer different rights on 2 debtors. “[T]here is no overlap between these rights.” Id. at 3 756 (emphasis added). Depending on the circumstances, a given 4 debtor may be entitled to one or the other, or to both, or to 5 neither. Id. 6 1. The Article 4 automatic homestead exemption 7 The Article 4 automatic homestead exemption is applicable 8 under California law when a person’s homestead is damaged, 9 destroyed, taken by eminent domain or sold involuntarily in 10 satisfaction of a debt. CCP § 704.720(b). For purposes of 11 bankruptcy law, the creation of the bankruptcy estate upon the 12 filing of the petition is treated as equivalent to an involuntary 13 sale. In re Diaz, 547 B.R. at 334. Thus, the automatic 14 homestead exemption is applicable in bankruptcy cases. 15 This is an “exemption” in the familiar bankruptcy law sense: 16 it prevents the judgment creditor (or the bankruptcy trustee) 17 from forcing a sale of the homestead unless there is sufficient 18 equity to pay the debtor the amount of the exemption. The debtor 19 is entitled to be paid ahead of the judgment creditor or trustee. 20 CCP § 704.850(a)(1)-(4). The exemption protects a “homestead,” 21 defined as a dwelling in which the debtor or the debtor’s spouse 22 resided on the date the judgment creditor’s lien attached (in 23 bankruptcy, the petition date) and has resided continuously until 24 the court’s determination that the dwelling is a homestead. CCP 25 § 704.710(c). Thus, this protection is available in bankruptcy 26 if the debtor was living in the home on the petition date. The 27 exemption is “automatic” in the sense that it requires no 28 affirmative act by the debtor to make it effective; rather, it
11 1 applies automatically to any dwelling that meets the definition. 2 2. The Article 5 declaration of homestead 3 If, however, the debtor chooses to record a declaration of 4 homestead with the county recorder’s office, the debtor is 5 entitled to additional protections, including, without 6 limitation, the following: 7 i. Lien Attachment: If a debtor is entitled to an 8 automatic homestead exemption, the filing of a declaration of 9 homestead prevents judgment liens from attaching to the portion 10 of the debtor’s equity in the homestead covered by the exemption. 11 CCP § 704.950(c). Note that this provision does not 12 independently create an impediment to a forced sale. See CCP 13 § 704.920.4 It shields the exempt equity against the future 14 attachment of judgment liens. See Katz v. Pike (In re Pike), 243 15 B.R. 66, 70 (9th Cir. BAP 1999). 16 ii. Voluntary Sale: If a homesteader voluntarily sells 17 the declared homestead, the proceeds of that sale are themselves 18 exempt for six months. CCP § 704.960(a). This protects debtors 19 from the danger that eager creditors will pounce as soon as the 20 homestead is reduced to cash. Under this provision, the debtor 21 has six months to reinvest that cash before creditors can reach 22 it. 23 This protection differs from the lien attachment protection 24 in two important ways. First, it creates an actual exemption (in 25 26 4 To the extent the homestead property remains a 27 “dwelling,” as defined in CCP § 704.710(a), all Article 4 protections in relation to forced sale apply. See CCP 28 § 704.970(b).
12 1 proceeds of a voluntary sale), rather than merely enhancing the 2 automatic exemption. Second, it can exist even if a debtor is 3 not entitled to an automatic exemption, for instance, if the 4 debtor does not satisfy the continuous residency requirement. In 5 re Anderson, 824 F.2d at 757 (after homestead declaration is 6 recorded, “moving away from the homestead does not destroy the 7 [voluntary sale] exemption status”). 8 As noted above, the protections pertaining to a declared 9 homestead are separate and distinct from the automatic homestead 10 exemption, though a debtor may enjoy both sets of protections if 11 he or she satisfies the requirements for both. A declaration of 12 homestead by itself generally does not confer protections or 13 rights in relation to a forced sale. Kelley v. Locke (In re 14 Kelley), 300 B.R. 11, 21 (9th Cir. BAP 2003); In re Anderson, 824 15 F.2d at 758. 16 B. The declared homestead protections in this case 17 Because the filing of a bankruptcy petition is equivalent to 18 a forced sale, it is typically the automatic exemption, not the 19 declared homestead protection, that applies to sales by 20 bankruptcy trustees. In re Kelley, 300 B.R. at 17. This 21 proposition would seem to render the 2002 Homestead Declaration 22 irrelevant to the summary judgment motion, but the bankruptcy 23 court gave a number of reasons for concluding otherwise. 24 First, the bankruptcy court reasoned that “the Trustee’s 25 powers to liquidate estate assets are derived from those of a 26 creditor who holds a judgment lien. § 544.” Salvi v. Galli (In 27 re Pass), Adv. No. 14-01056 at 12 (Bankr. E.D.Cal. October 14, 28 2015). Because a homestead declaration shields the homestead
13 1 from the attachment of judgment liens, the court concluded that 2 the 2002 homestead declaration likewise shielded the Manila 3 Avenue Property from the Trustee’s reach. We reject this 4 conclusion. To begin with, although § 544 empowers the Trustee 5 to exercise the rights of prepetition lienholders for some 6 purposes, not all of “the Trustee’s powers to liquidate estate 7 assets” are derived in this way. Section 363 permits trustees to 8 use, sell or lease property belonging to the bankruptcy estate, 9 regardless of whether any prepetition creditor could have done 10 so. 11 It is true that, for purposes of allowing or disallowing 12 state law exemptions, courts treat the filing of the bankruptcy 13 petition as the date on which a hypothetical judgment lien 14 attaches. It does not follow that the Trustee’s power over 15 estate assets constitutes an actual lien that must “attach” 16 before it can be exercised. The lien attachment restrictions 17 arising from the declaration of homestead do not prevent the 18 Trustee from exercising his sale powers. 19 Second, the bankruptcy court pointed to the following 20 language from CCP § 704.960(b): 21 If the proceeds of a declared homestead are invested in a new dwelling within six months after the date of a 22 voluntary sale or within six months after proceeds of an execution sale or of insurance or other 23 indemnification for damage or destruction are received, the new dwelling may be selected as a declared 24 homestead by recording a homestead declaration within the applicable six-month period. In such a case, the 25 homestead declaration has the same effect as if it had been recorded at the time the prior homestead 26 declaration was recorded. 27 (emphasis added). The bankruptcy court interpreted the 28 emphasized language as “protecting” the proceeds of an
14 1 involuntary sale, contrary to our statement in Kelley that “the 2 additional benefits conferred in Article 5 would benefit [the 3 debtor] only in the situation of a voluntary sale.” In re 4 Kelley, 300 B.R. at 21 (emphasis in original). 5 The “additional benefits” we referred to in Kelley were, 6 primarily, the six-months exemption provided by Article 5 for 7 proceeds of a voluntary sale (and further encompassing extension 8 of protections if the proceeds are timely reinvested in a new 9 homestead). The quoted statutory language does not create an 10 entitlement to proceeds, nor does it create an exemption in 11 proceeds. A comparison of subsections (a) and (b) of CCP 12 § 704.960 makes this conclusion inescapable. Subsection (a) 13 reads: “If a declared homestead is voluntarily sold, the proceeds 14 of sale are exempt . . .” (emphasis added). Subsection (b), as 15 quoted above, does not use the word “exempt” at all. Instead, it 16 provides that if a declared homestead is sold involuntarily, and 17 the debtor for some independent reason is entitled to receive 18 proceeds from that sale (perhaps because he also enjoys an 19 automatic homestead exemption, or perhaps because the sale 20 generates a surplus), and the debtor reinvests those proceeds in 21 a new homestead, and the debtor records a new homestead 22 declaration, then the new declaration will relate back to the 23 date of the original homestead declaration. If the debtor is not 24 otherwise entitled to receive proceeds, this provision does not 25 change that situation. 26 Finally, the bankruptcy court suggested that the Trustee’s 27 proposed sale of the Manila Avenue House might alternatively be 28 considered a voluntary sale, because the Manila Avenue House “is
15 1 property of the estate over which the Trustee is effectively the 2 owner.” Salvi v. Galli (In re Pass), Adv. No. 14-01056 at 10 3 (Bankr. E.D.Cal. October 14, 2015). We must reject this 4 proposition as inconsistent with our previous decisions holding 5 that the filing of the bankruptcy petition itself constitutes a 6 “forced sale” for exemption purposes. In re Diaz, 547 B.R. at 7 334; In re Kelley, 300 B.R. at 21; In re Pike, 243 B.R. at 70. 8 The bankruptcy court declined to decide whether Galli might 9 be entitled to an automatic homestead exemption under Article 4. 10 However, in order to determine whether the undisputed facts 11 entitled the Trustee to judgment as a matter of law, we must turn 12 next to this issue. 13 C. The automatic homestead exemption is available to Galli. 14 When Pass and Galli initially filed their joint chapter 13 15 petition, they asserted an entitlement to an automatic homestead 16 exemption in the Manila Avenue House. There is no question that 17 this exemption is available to bankruptcy debtors, and there is 18 no dispute that Galli was entitled to it at the time. Since the 19 filing of the petition, Pass and Galli have divorced, and Galli’s 20 bankruptcy case has been dismissed. Thus, in order to determine 21 whether Galli is entitled to an automatic homestead exemption in 22 the Manila Avenue House, we must answer two questions: First, 23 whether Galli, as a non-debtor, may assert any exemption in 24 property of the Pass bankruptcy estate; and second, whether Galli 25 is entitled to a homestead exemption under California law. 26 1. Galli’s non-debtor status does not preclude his claiming an exemption in estate property. 27 28 In answering the first question, we confront a dearth of
16 1 published decisions involving circumstances analogous to those 2 present here. We decided a related question in Burman v. Homan 3 (In re Homan), 112 B.R. 356 (9th Cir. BAP 1989). There, the non- 4 debtor wife of a chapter 7 debtor attempted to claim a state-law 5 homestead exemption in a home that was property of the bankruptcy 6 estate. The debtor had claimed no exemption in the home and had 7 asserted unrelated federal exemptions instead. We held that the 8 debtor’s decision not to claim an exemption “binds” the non- 9 filing spouse. Id. at 359. Because he had elected not to claim 10 the home as exempt, his wife was unable to claim an exemption of 11 her own. Id. 12 What is true of spouses, however, is not necessarily true of 13 ex-spouses. In Homan, we recognized that Congress designed the 14 exemption provisions of the Code “to encourage spouses to file 15 jointly.” Id. at 360. We noted that the debtor’s wife was 16 seeking “to do as a nondebtor spouse what she would be prohibited 17 from doing as a joint debtor,” namely asserting an exemption that 18 was inconsistent with the list of exemptions already asserted by 19 the debtor. Id. This concern is absent here, as Galli is no 20 longer married to Pass. The congressional goal of encouraging 21 joint filings has no applicability to ex-spouses, since ex- 22 spouses are not permitted to file jointly. Also inapplicable to 23 Galli is the community property discharge, which we identified as 24 a counterbalancing advantage to the otherwise “hard result” of 25 denying non-debtor spouses any say in the selection of 26 exemptions. Id. In short, with respect to Galli, we see neither 27 the statutory concern that animated the reasoning of Homan nor 28 the primary factor that mitigated the harshness of its result.
17 1 We therefore decline to extend Homan beyond the situation to 2 which it was addressed, namely the attempt by a non-filing, 3 current spouse of a debtor to assert exemptions to which he or 4 she would not be entitled as a joint debtor. 5 The mere fact that Galli is not the debtor does not prohibit 6 him from asserting a state law exemption in property of the 7 bankruptcy estate. Instead, we must look to California law to 8 determine whether the undisputed facts entitle Galli to an 9 automatic homestead exemption in the Manila Avenue House. 10 2. Galli is entitled to an automatic homestead exemption. 11 Even if Galli’s non-debtor status does not prevent him from 12 asserting a homestead exemption, the Trustee nevertheless argues 13 that he is not entitled to exempt the Manila Avenue House. The 14 Trustee correctly points out that a debtor’s entitlement to claim 15 exemptions is determined as of the original petition date. 16 Moffatt v. Habber (In re Moffatt), 119 B.R. 201, 204 n.3 (9th 17 Cir. BAP 1990); Cisneros v. Kim (In re Kim), 257 B.R. 680, 685 18 (9th Cir. BAP 2000). Thus, because Pass and Galli were married 19 when they filed their joint petition, the Trustee argues that 20 both of them are limited to the exemption rights they enjoyed as 21 a married couple on the petition date. Since California law 22 prohibits spouses from claiming exemptions in more than one 23 homestead, and since Pass successfully defended her exemption in 24 the Coalinga House, the Trustee asks us to conclude that Galli 25 may not claim an exemption in the Manila Avenue House. 26 Though it has a certain syllogistic plausibility, we must 27 reject this argument. The principle that exemption rights are 28 determined as of the petition date cannot be stretched so far as
18 1 to require that a debtor’s marital status on the petition date is 2 fossilized for the duration of the case. Even less should former 3 joint debtors whose cases have been severed and dismissed be 4 yoked, for state-law exemption purposes, to their ex-spouses who 5 remain in bankruptcy. To hold otherwise would flout the well- 6 established principle that “bankruptcy courts [should] avoid 7 incursions into family law matters . . . .” Allen v. Allen (In 8 re Allen), 275 F.3d 1160, 1163 (9th Cir. 2002)(quoting MacDonald 9 v. MacDonald (In re MacDonald), 755 F.2d 715, 717 (9th Cir. 10 1985). We must determine Galli’s homestead rights under 11 California law based on his marital status as of the present, not 12 as of the petition date.5 13 Under California law, as the Trustee notes, where spouses 14 reside in separate homesteads, only one of the homesteads is 15 exempt. CCP § 704.720(c). If Pass and Galli were still married, 16 this would appear to be dispositive. However, “after the 17 judgment of dissolution or legal separation, each former spouse 18 has the right to declare a homestead on any property in which he 19 or she has an interest and actually resides.” 12 W. Scott 20 Shepard and Karl E. Geier, Cal. Real Est. § 43:40 (4th ed. 2016). 21 Moreover, each former spouse “qualif[ies] for the automatic 22 exemption for property on which he or she resides . . . .” Id. 23 We agree with the bankruptcy court that there is no dispute that 24 5 25 The Trustee’s counsel suggested during oral argument that this approach would permit postpetition exemption planning by 26 spouses, who could obtain a divorce after filing in order to augment their exemptions. We are disinclined to allow such a 27 speculative concern to drive us to the draconian result the 28 Trustee seeks, particularly as there is no indication in the record that Pass and Galli sought their divorce for any collusive or otherwise improper purpose.
19 1 Galli was living at the Manila Avenue House on the date the joint 2 petition was filed.6 Thus, the bankruptcy court properly 3 concluded that the Trustee may not sell the Manila Avenue House 4 without compensating Galli. 5 The Trustee’s final argument is that, if Galli has a 6 “homestead interest,” the bankruptcy court was required to 7 determine the dollar value of that interest. As the bankruptcy 8 court correctly noted, however, this relief was not requested in 9 the Trustee’s complaint, and it is not necessary to make this 10 determination unless and until the Trustee attempts to sell the 11 Manila Avenue House. 12 VI. CONCLUSION 13 Based upon the foregoing, we conclude that the bankruptcy 14 court erred in concluding that the 2002 Homestead Declaration 15 prevented the Trustee from selling the Manila Avenue House. We 16 conclude, however, that Galli is entitled to an automatic 17 homestead exemption in the Manila Avenue House. Consequently, we 18 AFFIRM both the Summary Judgment Order and the Judgment. 19 6 20 The Trustee’s power, if any, to sell the Manila Avenue House arises from the filing of the original joint petition. For 21 purposes of determining a debtor’s homestead exemption rights 22 under California law, bankruptcy courts treat the filing of the petition as both the attachment of a hypothetical judgment lien 23 and, simultaneously, as the court determination that the dwelling is a homestead. In re Diaz, 547 B.R. at 335. There appears to 24 be no dispute in this appeal that the same analysis applies to 25 the determination of a non-debtor’s exemption rights in estate property. We assume, without deciding, that this is correct. 26 The Trustee’s counsel further conceded at oral argument that 27 the Trustee’s proposed sale should be treated as involuntary, hence capable of triggering the automatic homestead exemption. 28 Again, as the issue is not disputed, we need not decide it and will treat the proposed sale as an involuntary or forced sale under California law.